Overview

With an estimated 57m ha of agricultural lands, farming has long been the backbone of Indonesia’s economy. From small-scale farming to large commercial plantations, the sector employs around one-third of the workforce, is an important source of income for local households and has contributed much-needed export revenue. Partly as a result of adopting business-friendly initiatives, the sector has been able to attract necessary investment, which in turn is helping to bridge structural gaps. However, there remain a number of challenges, including slow adoption of mechanisation and vulnerability to climate change.

Rural income is predominately generated by small-scale growers who lack access to finance and technology, which hinders their commercial viability. Nevertheless, the country’s vast areas of arable land and extensive marine resources, combined with a thriving tech innovation ecosystem, offer significant potential for long-term, value-added expansion.

Structure & Oversight

The agriculture industry is broadly divided into smallholders employing traditional farming methods, and large-scale, mechanised plantations owned by the state or private conglomerates. Indonesia’s most important agricultural products are palm oil, rubber, rice, coffee, cocoa, tea, cassava, and a range of tropical spices including cloves, pepper, cinnamon and nutmeg. The Ministry of Agriculture (MoA) is the main governing body tasked with overseeing the sector. Included in the structure of the MoA are directorates in charge of food crops, horticulture, infrastructure and facilities, livestock, estate crops, and processing and marketing, as well as agencies for research and development, food security, quarantine and human resources development.

Performance

According to Statistics Indonesia (BPS), agriculture accounted for 13.6% of GDP in the first half of 2018. While this is up from 13.1% in 2017, the general trend over the years has seen the sector’s share of GDP decline, as development is increasingly underpinned by the construction, manufacturing, trade, hotels and restaurant sectors. In 1980, for example, agriculture accounted for 24% of GDP.

The sector is still a primary driver of the economy, however, with projections from the BPS showing that agriculture is expected to grow by between 3% and 3.4% in 2019. Employment in the sector has decreased considerably as young people seek education and opportunities in urban areas. The number of workers fell from 44% of the workforce in 2005 to 30.2% in 2018, according to the World Bank. “One of the most significant issues right now in rural areas is the lack of available labour,” Ade Candradijaya, a director at the MoA, told OBG. “As a result, the ministry has provided hand tractors and transplanters to increase mechanisation and boost productivity.”

Agricultural Policy

Indonesian agricultural policy is underpinned by the National Medium-Term Development Plan 2015-19. Among other objectives, the plan aims to achieve food security by boosting domestic production, independently regulating food policy and improving the lives of farmers. The plan also includes government support for smallholder farmers through investing in infrastructure, improving the quality of food and nutrition, and enabling farmers to cope with environmental risks.

With presidential elections set to take place in April 2019, agricultural policy has been an important part of the debate. Presidential challenger Prabowo Subianto has pledged to halt imports of food crops such as sugar, wheat and maize, which he has blamed for bringing down prices of locally grown crops. Imports of these products increased 33% in value terms to reach $7.95bn in 2018. Meanwhile, President Joko Widodo has defended the import of food crops as necessary for controlling inflation, which eased to 3.1% in 2018, down from more than 8% when he took office in 2014.

Global players are also active in agricultural policy. The government launched the Indonesia Country Strategic Plan 2017-20 with the help of a $13m allotment from the World Food Programme (WFP), to further improve nutrition and the quality of food, and mitigate the effects of natural disasters on food security by boosting logistics capabilities.

Land Use

According to the latest data from the World Bank, around 13% of land in Indonesia was classified as arable in 2016, compared to a global average of 10.9%. This can be attributed to the conversion of forested areas for oil palm cultivation, which saw the land allocated to agriculture expand by more than 50% over the 1980-2014 period. This has been a source of international concern, as around 63% of new oil palm plantations in Indonesia between 1990 and 2010 came at the expense of biodiversity-rich tropical forests.

While there have been considerable efforts to involve local oil palm farmers in the voluntary Roundtable for Sustainable Palm Oil international certification programme, only a fraction of Indonesian producers have obtained the accreditation, due to its high cost. To rectify this, the government developed its own certification initiative in 2011, the Indonesian Sustainable Palm Oil system. Farming methods in Indonesia can be broadly divided into four types: intensive wetland paddy fields, which are lowland and irrigated; dryland secondary crop fields, which are upland and rain-fed; estate plantations, where industrial crops are grown; and agro-forestry. The first two categories are typically managed by smallholders, while the latter two are mainly operated by large companies. Java contains around 40% of the nation’s wetland paddy field and contributes around half of all food crops. The islands of Kalimantan, Papua and Sumatra are swampy and covered by peat, making plantation crops, such as oil palm, rubber, coconut and coffee, the main agricultural products in these areas. Smallholders represent a large portion of Indonesia’s agricultural producers with around 75% of farmers working less than 1 ha of land in 2014, according to the latest data published in the “Agricultural Outlook 2017-26” report from the OECD and the UN Food and Agriculture Organisation (FAO).

Self-sufficiency

Food insecurity in the 1980s and early 1990s prompted the administration of former President Suharto to implement policies aimed at achieving self-sufficiency in key crops. Such strategies have been continued by successive administrations to the present day with varying degrees of success. Indonesia now has one of the most ambitious self-sufficiency policies in South-east Asia, aiming to reduce or eliminate imports across all main staple products. Under this scheme the country aimed to become self sufficient in rice, maize and soybeans by 2017, and beef and sugar by 2019. Although definitions of self-sufficiency vary, the government claims to have achieved its rice production goals (see analysis).

“Indonesia’s production of rice and maize exceeds the needs of domestic consumption,” Candradijaya told OBG. “We are already exporting such commodities to Malaysia from Kalimantan.” The target for total soybean self-sufficiency has seemingly not been met yet, with the country still reliant on imports in 2018.

Food Security

However, despite the progress being made towards boosting food security, as of October 2018 Indonesia ranked 65th out of 113 countries on the Economic Intelligence Unit’s Global Food Security Index, lower than regional neighbours Singapore (1st), Australia (6th) and Malaysia (40th), but higher than ASEAN peers such as the Philippines (70th), Myanmar (82nd) and Cambodia (85th).

The cost of food in Indonesia is also considerably higher than in many nearby countries. For instance, rice prices in Indonesia are 50-70% higher than those in Thailand or Vietnam; and, according to the World Bank, Jakarta is the most expensive capital city in emerging Asia for fresh fruits and vegetables. Consumers in the capital city pay a premium of 128.4% over those in New Delhi for a basket of fruit and vegetables, 72.8% more than Beijing and 45.6% more than in Kuala Lumpur. Consumer items including eggs, chicken, carrots and mangoes cost shoppers 25-50% more than in neighbouring Singapore, which imports almost all of its food. Residents of Jakarta also pay more than shoppers in the capital cities of Bangkok, Manila and Hanoi.

While Indonesia has halved the percentage of its population living in hunger and extreme poverty since 2007, some 19.4m Indonesians are still unable to meet their daily nutritional requirements, according to the WFP. Access to food is limited due to the combination of fluctuating prices, poverty and poor infrastructure – particularly outside major cities. Indeed, Indonesia continues to have high rates of malnutrition. More than one in three – equating to approximately 9m – children across Indonesia are stunted. In July 2018 President Widodo met with Jim Yong Kim, who was at that time the president of the World Bank, to discuss a plan to eliminate stunting using the private sector, civil society and technology, although details had yet to be published as of early 2019.

Addressing Challenges

In the meantime, other plans to address malnutrition are under way. To facilitate cheaper transportation of food to remote areas, in August 2018 President Widodo unveiled the nation’s AMM des light pickup truck. The vehicles are part of an initiative funded by the Ministry of Industry, and can transport up to 700 kg of agricultural goods and be operated as a mobile rice miller. Local company Kiat Mahesa Wintor Indonesia will produce 3000-6000 vehicles by the end of 2019.

Measures to improve irrigation infrastructure should further improve food security. In mid-2018 the Asian Infrastructure Development Bank announced that it had approved a $250m loan to shore up irrigation services and management accountability. The project, which is projected to provide 88,700 farming households with more efficient and climate-resilient irrigation systems, is co-financed by the World Bank.

ASEAN Integration

Many observers have argued that Indonesia should loosen import restrictions for food, particularly with staples like rice. It has been projected by the OECD that ASEAN rice market integration would reduce the undernourished population of Indonesia, Myanmar, the Philippines, Thailand and Vietnam by 5%. Indonesia, along with the Philippines, would benefit the most from full regional integration in terms of food security. Nonetheless, the FAO has predicted rice production gains of more than 15% in Indonesia, Myanmar and Vietnam in the 2017-26 period.

Cocoa

As the third-largest cocoa producer in the world behind Ghana and Côte d’Ivoire, Indonesia’s production registered 260,000 tonnes in the 2017/18 growing season, a decline from 290,000 and 320,000 tonnes in the 2016/17 and 2015/16 seasons. According to the Indonesia Cocoa Industry Association (AIKI) and the Indonesian Coffee and Cocoa Research Institute, the cocoa bean is one of the best-performing foreign exchange generators in the agriculture sector, after palm oil, rubber and coconut.

Despite this, cocoa production is in decline due to ageing trees and farmers’ decisions to switch to more profitable crops such as oil palm. According to Piter Jasman, the chairman at AIKI, on 3 ha of land, a farmer can produce 700 kg of cocoa per year, earning Rp17.5m ($1240). However, that same plot of land used for oil palms could earn the farmer Rp31.5m ($2233). While there is room for expansion, the industry is restricted by the inability of smallholder farms, which make up around 95% of the industry, to capitalise on demand for chocolate and invest in value-added services.

Palm Oil

Indonesia is by far the world’s largest producer of palm oil, producing some 43m tonnes in 2018, an increase of 6.5m tonnes on 2017 and double that of the second-largest producer, Malaysia. Palm oil is the most commonly used vegetable oil in the world, and around 90% of supply comes from Indonesia and Malaysia. The crop provides direct or indirect employment for approximately 12m Indonesians. Indonesia itself consumes high levels of palm oil, and the majority of its exports go to China, India, Pakistan, Malaysia and the Netherlands. While the EU has pledged to phase out palm oil’s use in transport fuels from 2030 due to environmental concerns, any negative effects on Indonesia’s trade balance may be tempered by China’s 2018 pledge to increase imports of crude palm oil from the country by 500,000 tonnes per year.

Oil palms are by far the most important crop contributor to GDP, accounting for between 1.5% and 2.5% on an annual basis. However, Yusup Lemanah, associate partner at PwC, told OBG that volatility in oil palm prices since 2012 has been a significant concern for producers. Moreover, in order to ease growing environmental concerns, in September 2018 President Widodo signed a moratorium on new oil palm plantation development. Nevertheless, domestic demand for palm oil is expected to remain robust, with both the current president and his main opponent vowing to boost the use of the commodity to help achieve the goal of energy self-sufficiency.

Rubber

Indonesia is the second-largest producer of natural rubber in the world, two-thirds of which is harvested in Sumatra. Rubber plantations also exist in Kalimantan, Sulawesi and Java. Some 85% of rubber producers are smallholders. Small-scale individual farms contributed 81% of national output, which reached 3.63m tonnes in 2017.

“Currently, 95% is processed as technically specified rubber (TSR) 20,” Moenardji Soedargo, chairman of the Indonesian Rubber Association, told OBG. “Indonesia is the largest producer of TSR20 in the world, with TSR20 being the most common rubber material used by tyre manufacturers.” While there is currently an oversupply of stock due to the global slowdown in demand for the product, particularly from China, domestic demand is expected to remain strong, aided by growing vehicle sales in Indonesia, as well as in ASEAN member states Malaysia, Myanmar, Thailand and Vietnam.

Cereals

In 2018 Indonesia produced 11.9m tonnes of maize, making it the 11th-largest producer globally and the largest producer in South-east Asia, according to figures from the US Department of Agriculture (USDA). Estimates from the USDA see Indonesia producing 12m tonnes in the 2018/19 season, representing a three-year high. The government is targeting self-sufficiency in maize; however, imports are expected to increase by 20% to 600,000 tonnes in 2019 to meet rising domestic demand for the crop.

As with several other staple crops, most rice in Indonesia is grown by smallholders, with 74% of the 14.1m rice-farming households owning less than 1 ha of farmland. Production of the crop grew from 57.2m tonnes in 2007 to 81.4m tonnes in 2017.

Coffee

Indonesia is the fourth-largest producer of coffee in the world, behind Brazil, Vietnam and Columbia, producing 636,000 tonnes in the 2017/18 growing season. Almost 90% of Indonesia’s coffee harvest is Robusta beans, making it the third-largest producer of the crop globally. Indonesia also grows small-harvest Arabica beans on Sumatra, with global coffee retailer Starbucks one of their primary buyers.

Smallholders make up around 90% of coffee growers in Indonesia, and there are some 1.5m independent farms across the country. However, production has fallen by 8% over the past five years due to unfavourable weather conditions, poor field maintenance and shifts to other higher-value crops, a situation which has seen exports drop by 20% over the same period. Domestic consumption, meanwhile, has doubled in the past decade. “Much like Brazil, Indonesia has become a consumer of coffee since the turn of the millennium,” Teddy Kusumah Somantri, founder of domestic firm Javanero, told OBG. “Currently, the ratio of coffee produced for domestic consumption and export is approximately 40:60,” he added.

In an effort to build a more inclusive domestic coffee market, the Sustainable Coffee Platform of Indonesia was established in 2015 to support public-private partnerships, and promote financial inclusion and technology transfer among farmers. Given growing domestic consumption and international demand for coffee, the programme has been applauded as a necessary step. While concrete data is difficult to obtain, it is believed that domestic consumption of coffee is growing at a rate of 8% per annum, compared to the international average of 2-2.5%, according to figures from the Association of Indonesian Coffee Exporters.

Fisheries

More efforts have been placed in developing a strong fisheries and aquaculture segment. With a coastline exceeding 99,000 km, the archipelago is the second-largest producer in the world in terms of fisheries and aquaculture. According to data from the FAO, in 2016 Indonesia produced 11.4m tonnes of fisheries and aquaculture goods, behind only China (66.8m tonnes) and ahead of India (10.8m tonnes). Furthermore, FAO projections see this figure increasing by 31.9% to 15.2m tonnes by 2030.

The production of farmed seaweed increased from 3.9m tonnes in 2010 to 11.6m tonnes, or 38.7% of total global production, in 2016. That year Indonesia was the second-largest producer of seaweed in the world after China (14.4m tonnes) and ahead of the Philippines (1.4m tonnes). Officials have taken a hard-line approach to illegal, unreported and unregulated (IUU) fishing since 2014. Government efforts, including arresting transgressors, and seizing and destroying at least 488 mostly internationally flagged vessels, have seen fish stocks rebound from 7.1m tonnes in 2016 to 12.5m tonnes in 2017. It was reported that up until 2014, Indonesia lost an estimated $4bn per year due to IUU fishing activity.

The government has also pursued policies to promote the modernisation of traditional fishing fleets and in August 2018 announced plans to build more than 3300 new boats for local fishers. In addition, the authorities have restricted imports of seafood products to protect domestic suppliers, and supported infrastructure development and encouraged foreign direct investment in value-added processing.

Risk & Insurance

As an archipelago situated on the Pacific Ring of Fire, food production is vulnerable to climate change, and the country has seen roughly one natural disaster every week since the 2004 tsunami. Throughout 2018 earthquakes and tsunamis disrupted agricultural production in Central Sulawesi, Lombok, and parts of Java and Sumatra. Furthermore, uncharacteristically high rainfall levels during the final months of the 2017/18 monsoon season led to an increase in floods and landslides, and the country also experienced higher rates of land and forest fires during the dry season in early 2018.

One of the aims of the 2013 Farmer Protection and Empowerment Act is to protect the nation’s farmers from crop failure through agriculture insurance. This mandates that local and national governments provide coverage for losses caused by natural disasters, pests, outbreaks of infectious animal diseases and climate change. The policy is motivated by Indonesia’s desire for food self-sufficiency and climate change preparedness. Given that the majority of low-income citizens live in rural areas, the act was written to protect the incomes of vulnerable farming households.

In May 2018 the FAO publicly praised Indonesia’s agriculture insurance scheme, highlighting the difficulty of adopting such policies. Several pilot insurance projects targeting rice farmers have also been implemented in West, Central and East Java provinces. The initiative remains in a pilot stage, however, and faces the same challenges all agriculture insurance faces. “It is hard to encourage private financial institutions to insure agricultural businesses because they view them as high-risk,” Candradijaya told OBG. “Meanwhile, convincing farmers of the benefits of agriculture insurance also poses a challenge.”

Investment & Subsidies

The Indonesian government passed a budget of Rp21.6trn ($1.5bn) for agriculture in 2019. Of that, some Rp6trn ($425.5m) will go to the MoA’s Directorate of Food Crops, which is responsible for running a massive fertiliser subsidy programme aimed at providing farmers with affordable products and ensuring profitable operations. Introduced in 1971 to complement the new, high-yield strains of rice that were becoming available, the programme has been expensive, yet integral to broader aims of self-sufficiency in rice production. In 2016, for example, the subsidised fertiliser scheme accounted for around half of the entire agriculture budget.

Fertiliser production remains dominated by five state-owned companies, with the private sector only emerging as a competitor in the 1990s and holding a small share of the market. Critics argue that vested interests have maintained this structure for decades by resisting reform. The programme is supposed to subsidise fertilisers used by smallholder farmers only, yet significant amounts of fertiliser have been sold to large commercial plantations. A government report suggested that some 30% of subsidised fertilisers were misallocated in 2015. The US-based International Fertiliser Development Centre recommended in February 2017 that the government reform its fertiliser subsidy scheme to reduce its cost. This would free up greater funding for improving overall agriculture infrastructure, as well as shoring up initiatives in crop insurance and rice paddy support.

Outlook

Due to the political sensitivity surrounding the government’s fertiliser subsidy scheme and the popularity of self-sufficiency goals, broader reform to Indonesia’s agricultural policies seems unlikely in the foreseeable future. However, tackling stunting caused by malnutrition and lifting the country’s millions of smallholder farmers out of poverty will continue to be major social and economic priorities.

As small-scale farmers grow most of the staple crop varieties, increasing technical knowledge, capacity and technological adoption is important. Indonesia seems well placed to progress in its aim of food security, especially if the government continues to provide a combination of subsidies, insurance and food programmes to local communities. Palm oil, coffee and other high-value exports will continue to drive growth in the Indonesian agricultural economy. The next decade is set to be one of significant change, with the focus shifting to sustainability and environmental protection, including initiatives to improve the traceability of products, and enhance enforcement of regulations on deforestation and illegal activities.